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What is downsizing?
A downsizing strategy reduces the scale (size) and scope of a business to improve its financial performance A reduction of the workforce is one of only several possible ways of improving profitability or reducing costs.

Purpose of downsizing
Improve financial performance through Costcutting, while also achieving long-term effectiveness, efficiency, productivity, competitiveness

Why do firms downsize?

Reduce costs Reduce layers of management to increase decision making speed and get closer to the customer Sharpen focus on core competencies of the firm, and outsource peripheral activities Generate positive reactions from shareholders in order to improve valuation of stock price Increase productivity

Downsizing effects - overall

Mixed effects on firm performance: some shortterm costs savings, but long-term profitability & valuation not strongly affected. Firms reputation as a good employer suffers. Example: Apple Computers reputation as good employer declined after several layoffs in 1990s. Downsizing forces re-thinking of Employment Strategy. Lifelong employment policies not credible after a downsizing. Example: IBM abandoned lifelong policy after several layoffs in early 1990s.

Downsizing effects employee morale

Employee motivation disrupted: increase in political behaviors, anger, fear - which is likely to negatively impact quality of customer service Violation of psychological contract, leads to cynicism, lowered work commitment, fewer random acts of good will Survivors experience more stress due to longer work hours with re-designed jobs, and increased uncertainty regarding future downsizings

Downsizing effects workforce quality

Many senior employees leave due to application of early retirement incentives: result is loss of institutional memory. The use of voluntary workforce reductions (buyouts) results in the most marketable employees leaving (stars) -- difficult to control since all employees must be legally eligible to qualify. Early retirements & voluntary reductions often result in too many people quitting, and some are hired back as consultants at higher cost to firm.

Downsizing Works Best When:

Changes in Strategy, Organization structure and Culture accompany job cuts of downsizing Weak business units and plant closures are used as basis of reductions, rather than across the board cuts affecting all units (including healthy ones)

Risks of downsizing
Short term cost cutting may lead to negative psychological reactions that HARM the long term aim of increased competitiveness. Downsizing may successfully induce a mindset shift and culture change among employees (e.g. no longer believe in a job for life), but if managed ineffectively, it may selfdestruct by causing industrial unrest and/or lack of commitment to organisational goals.

Survivors reaction to downsizing


Anger Anxiety Guilt Stress

Insecurity Dissatisfaction Low morale Low org commitment

Perceived unfairness Remorse Uncertainty

Absenteeism Turnover intention Risk aversion Resistance to change Less effort Poor performance

Moderating Variables Affecting Survivor Reactions to Downsizing

prior self-esteem prior organisational commitment tolerance of insecurity individual coping resources expectation that its me next perceptions of (in)equity, mgt. incompetence, lack of care

labour market conditions mobility of those made redundant economic neediness of those made redundant

ORGANISATIONAL prior work interdependence with the redundant staff shared values & attitudes with the redundant staff

Alternative Strategies for Downsizing

Workforce Reduction (reactive) - just cutting headcount. This tends to have adverse long-term effects on organisational effectiveness 2. Organisation Redesign (proactive) - cutting headcount through planned delayering, redesigning jobs, reducing work by cutting operations 3. Systemic change (proactive) - promoting employee involvement, and continuous improvement while reducing numbers

Managing the People Side of Downsizing

Management should understand the perspective of those at the bottom (or front line) of the organisation be sensitive to the psychological aspects of downsizing aim to prevent, and to alleviate, the incidence and strength of negative survivor reactions

Management should aim to provide as much employee discretion and influence as possible during and after downsizing strive to ensure that survivors perceive all aspects of the downsizing to have been acceptable

Company reason for targeting B&B retail

Teeth Tail Ratio very high

Cost too high



Fixed Cost

High no. of management layers

Employees are high in age(Average

Ajit Singhs Opinion

Downsizing of total industries soap division. Reduce soap division to half in next 3 years for the option of joint venture.